Income Taxes

Loss before provision for income taxes consisted of the following for the periods shown below:



	Year Ended July 31,
	2016			2015			2014
	(in thousands)
United States	$	(42,770	)	$	(51,336	)	$	(61,957	)
International	1,473			1,410			1,556
Total	$	(41,297	)	$	(49,926	)	$	(60,401	)

Income tax expense consisted of the following for the periods shown below:



	Year Ended July 31,
	2016			2015		2014
	(in thousands)
Current income tax provision:
Federal	$	—		$	—	$	—
State	—			4		—
Foreign	278			423		476
Total current tax provision	$	278		$	427	$	476
Deferred income tax provision
Federal	—			—		—
State	—			—		(96		)
Foreign	(63		)	—		12
Total deferred tax provision	(63		)	—		(84		)
Total income tax provision	$	215		$	427	$	392

For the fiscal years ended July 31, 2016, 2015 and 2014, the Company’s tax provision consisted principally of foreign income tax expense.

The reconciliation of federal statutory income tax provision to the Company’s effective income tax provision is as follows:



	Year Ended July 31,
	2016			2015			2014
	(in thousands)
Expected provision at U.S. federal statutory rate	$	(14,039	)	$	(16,975	)	$	(20,536	)
State income taxes—net of federal benefit	—			2			(96		)
Stock-based compensation	78			668			98
Common stock warrant	—			—			63
Tax credits	(941		)	(391		)	(225		)
Foreign tax rate differential	(30		)	(80		)	(67		)
Acquisition costs	—			—			125
Change in valuation allowance	15,301			17,570			20,790
Other	(154		)	(367		)	240
Total tax provision	$	215		$	427		$	392

Deferred tax assets and liabilities consisted of the following:



	July 31,
	2016			2015
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	81,822		$	75,812
Accrued liabilities	1,482			1,280
Tax credit carryforwards	5,859			3,759
Fixed assets	269			157
Deferred revenue	2,207			733
Stock-based compensation	1,996			806
Other	1			1
Valuation allowance	(92,846		)	(81,341		)
Total deferred tax assets	790			1,207
Deferred tax liabilities:
Intangible assets	(684		)	(1,163		)
Total deferred tax liabilities	(684		)	(1,163		)
Net deferred tax assets	$	106		$	44



	July 31,
	2016			2015
	(in thousands)
Recorded as:
Current deferred tax assets	$	—		$	1,076
Current valuation allowance	—			(1,050		)
Non-current deferred tax assets	92,908			81,477
Non-current valuation allowance	(92,802		)	(80,291		)
Current deferred tax liabilities	—			(5		)
Non-current deferred tax liabilities	—			(1,163		)
Net deferred tax assets	$	106		$	44

The Company determines its valuation allowance on deferred tax assets by considering both positive and negative evidence, including operating results, history of losses, and forecasts of future taxable income in various U.S. and foreign jurisdictions, in order to ascertain whether it is more likely than not that deferred tax assets will be realized. The Company records a valuation allowance to reduce the amount of deferred tax assets to the amount that is more likely than not to be realized. Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. Accordingly, the U.S. net deferred tax assets have been fully offset by a valuation allowance. A valuation allowance has not been recorded on certain foreign deferred net tax assets because these assets are expected to be realized on a more likely than not basis. The valuation allowance increased by $11.5 million and $23.1 million, respectively, during the years ended July 31, 2016 and 2015.

As of July 31, 2016 and 2015, the Company had net operating loss carryforwards for federal income tax purposes of $224.1 million and $193.3 million, respectively, which expire in the years 2024 through 2035. As of July 31, 2016 and 2015, the Company had net operating loss carryforwards for California state income tax purposes of $80.4 million and $162.5 million, respectively, which expire in the years 2016 through 2035. We had elected the three-factor apportionment formula pursuant to the Multistate Tax Compact, or MTC, in determining the state net operating loss carryforwards for certain years. In December 2015, the California Supreme Court overturned the California Appellate court decision on The Gillette Company et al. v. California Franchise Tax Board. The court held that the taxpayers couldn’t elect an evenly weighted, three-factor apportionment formula pursuant to the MTC. As a result of the California Supreme Court decision, we reduced our deferred tax assets and offsetting valuation allowance related to the California NOL calculated in earlier years pursuant to the MTC election.

As of July 31, 2016 and 2015, the Company had R&D credit carryforwards for federal income tax purposes of $5.0 million and $3.1 million respectively, which expire in the years 2024 through 2035. As of July 31, 2016 and 2015, the Company had R&D credit carryforwards for California income tax purposes of $4.2 million and $2.9 million respectively, which have no expiration date.

The Code, as amended, imposes restrictions on the utilization of net operating losses in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use net operating losses may be limited as prescribed under Internal Revenue Code Section 382 (“IRC Section 382”). Utilization of the federal and state net operating losses may be subject to substantial annual limitation due to the ownership change limitations provided by the IRC Section 382 and similar state provisions. Based on an analysis under Section 382 of the Internal Revenue Code, the Company experienced an ownership change in 2005 which substantially limits the future use of NOLs and certain other pre-change tax attributes as of that date. The Company has excluded the NOLs and R&D credits that will expire as a result of the annual limitations in the deferred tax assets as of July 31, 2016. To the extent that the Company does not utilize the carryforwards within the applicable statutory carryforward periods, either because of Section 382 limitations or the lack of sufficient taxable income, the carryforwards will expire unused.

The Company intends to reinvest its foreign earnings indefinitely. Accordingly, no U.S. income taxes have been provided on approximately $4.0 million of undistributed earnings and other outside basis differences of foreign subsidiaries. As of July 31, 2016, it is not practicable for the Company to determine the potential income tax impact of remitting these earnings.

The Company and its subsidiaries file income tax returns in the U.S. and in various states, local, and foreign jurisdictions. The tax years generally remain subject to examination by federal and most state tax authorities due to the ability to adjust net operating losses and credits. In significant foreign jurisdictions, the tax years generally remain subject to examination by their respective tax authorities. The Company is currently being audited by the India taxing authorities related to transfer pricing. Management has recorded a long-term tax liability for uncertain tax positions, including accrued interest and penalties.

Uncertain Income Tax Positions

The Company accounts for uncertainty in income taxes by determining whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the consolidated financial statements.

The following table summarizes the activity related to the Company’s unrecognized tax benefits:



	July 31,
	2016			2015
	(in thousands)
Balance at beginning of year	$	1,805		$	1,273
Increase related to prior year tax positions	202			194
Decrease related to prior year tax positions	(13		)	(20		)
Increase related to current year tax positions	605			358
Decrease related to lapse of statute of limitations	(48		)	—
Balance at end of year	$	2,551		$	1,805

If the gross unrecognized tax benefits at July 31, 2016 were recognized, $0.2 million of the recognition would affect the effective income tax rate. The Company is unable to make a reasonably reliable estimate as to when cash settlement with a taxing authority may occur. It is reasonably possible that the total amount of unrecognized tax benefits will increase or decrease in the next 12 months.

The Company also recognizes interest and penalties accrued in relation to unrecognized tax benefits as a tax expense. For the years ended July 31, 2016, 2015 and 2014, the Company recorded charges to tax expense of $33,000, $36,000 and $39,000 for interest and penalties, respectively. As of July 31, 2016 and 2015, the Company had $0.4 million and $0.5 million of accrued interest and penalties, which are included in non-current income tax liabilities in the consolidated balance sheets.